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The Best Part About Netflix's Earnings Report

The streamer's pricing power just keeps growing and growing.

Shares of the streaming juggernaut were up 9% after hours after the company blew past estimates once again in its latest quarterly report. Netflix posted a new record of 8.3 million subscriber additions in the fourth quarter of 2017, (2 million domestic and 6.4 million abroad), much stronger than the company's own forecast of 6.3 million as it said acquisition was "fueled by our original content slate and the ongoing global adoption of internet entertainment." Revenue increased 32.6% to $3.29 billion, and earnings per share improved from $0.15 to $0.41, matching analyst estimates.

However, the most impressive part of Netflix's report, and the biggest reason for shareholders to cheer, is that subscriber growth accelerated even as the company raised prices.

Stranger Things was one of several originals that drove strong growth in Q4. Image source: Netflix.

Flexing its muscles

In October, investors cheered when the company said it would raise prices on domestic subscribers starting in November, upping its monthly fee from $10 to $11 on its standard plan and from $12 to $14 for its premium package. The stock jumped 5% on the news and had gained 20% since then prior to the release of its fourth-quarter earnings report.

According to the results, that price increase had no impact on subscriber growth. Netflix said average selling prices (ASPs) in its domestic segment increased 5% even as it added 2 million new members, exceeding its own forecast of 1.5 million. Internationally, the results were even more impressive as ASP increased 12% due to pricing adjustments in several markets. Globally, ASP was up 9%.

Netflix's forecast for the first quarter of 2018 indicates that that strong growth is expected to continue even as the company continues to implement the price increases announced in October. The company is calling for 6.4 million new subscribers this quarter, an improvement from 5 million in the year-ago quarter, and projects 40% revenue growth and a record of $0.63 in earnings per share.

That accelerating growth even with rising prices shows the company's enviable pricing power and indicates that it has plenty of room to raise prices further before it would begin to drive subscribers away. I argued before when the company announced the October price increase that it would be a net benefit for subscribers, as they would get more and better content. Netflix members appear to agree.

A widening moat

That pricing power is evidence of Netflix's sizable and expanding moat, or the combination of factors that give it a competitive advantage. That moat is a key reason why the company is set to top $100 billion in market cap despite relatively minimal profits. The company has easily parried streaming rivals like Amazon and entrenched cable powerhouses like Disney, HBO, and FX, all of whom have stakes in Hulu, and CEO Reed Hastings' prediction that internet TV will grow every year for 20 years seems to become truer each quarter.

Netflix's pricing power indicates that the company could be significantly more profitable if it raised prices to what customers were willing to pay, but it keeps them low in order to drive growth. By comparison to Netflix's $11/month standard price, Time Warner's (NYSE:TWX) HBO charges $15/month, and Netflix spends significantly more on content. This year, the streamer expects to spend as much as $8 billion, while HBO will only spend around $2 billion for its programming. While HBO is still beating Netflix in awards and nominations, that may be a result of the company's differing strategies and audiences, rather than a failure in Netflix's content strategy. For example, the recently released Bright, starring Will Smith, was pilloried by critics but cheered by Netflix subscribers.

The results from this past quarter, with record subscriber growth even as prices increased, shows that Netflix's moat is wider than ever before. The company is growing at a record pace. Based on this round of results and Netflix's first-quarter forecast, 2018 is set to be another blowout year.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends AMZN, Netflix, and DIS. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.

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